Mergers & Acquisitions

$4B BOA-Countrywide Deal Price Tag Doesn't Include Legal Woes

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Bank of America Corp.’s newly announced deal to buy Countrywide Financial Corp. likely could cost considerably more than the $4 billion purchase price.

That’s because BOA is taking on a lengthy list of legal issues faced by Countrywide, the nation’s largest mortgage lender, as part of the deal, according to the Wall Street Journal (sub. req.) and Bloomberg.

The planned acquisition could even increase the amount of damages for which Countrywide might be held responsible, since BOA can presumably afford to pay the price, while Countrywide might well be bankrupted by it, the Wall Street Journal writes. Typically, the acquiring company in a takeover agrees to deal with pending litigation and, while it can limit legal risks to some extent, “it’s very difficult to eliminate all risk,” says Andrew Sandler of Skadden, Arps, Slate, Meagher & Flom.

Damages potentially could be awarded in litigation by investors who purchased packages of Countrywide mortgage loans based on alleged misrepresentations about their value, in litigation by shareholders contending that Countrywide didn’t adequately disclose its financial condition, in litigation by borrowers arguing that the company misled them about their loan terms and ability to make payments, and even in bank-versus-bank litigation over such issues, according to the Wall Street Journal and an earlier post.

As discussed in other posts, lawyers are predicting massive litigation over subprime mortgages generally, not just those issued by Countrywide, after widespread risky lending and rapidly rising defaults. Meanwhile, a bankruptcy judge has asked for additional discovery concerning the company’s collection practices after the revelation of questionable Countrywide letters.

An earlier post discusses a New York Times article that details Countrywide’s “lending spree.”

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